Credit cards and other payment instruments, such as debit cards and check cards, are widely used by holders to purchase goods and services in the marketplace. It is projected that at least 35% of all U.S. cardholder payments in 2007 will be made via “plastic” (i.e., a credit or debit card), and it is estimated that this rate will increase to at least 49% by 2010. The current annual value of these transactions exceeds 400 billion dollars. While credit card transactions are convenient for cardholders, they present a special set of problems for merchants and credit card issuers. One such problem occurs when a cardholder disputes a credit card transaction, necessitating the expenditure of substantial time and resources in investigating and resolving such disputes.
Cardholders and other purchasers using an electronic payment provider are increasingly going directly to their card issuer to resolve billing disputes rather than contacting the merchant directly. This trend toward chargebacks that are initiated with out any prior contact with the merchant by the cardholder results in inefficient resolution of such disputes because when the merchant is not directly involved in the resolution process, the card issuer must undertake the resolution activities on behalf of the merchant, thus increasing the complexity, time and expense of the resolution process.
To understand the problem presented by credit card and other electronic payment provider transaction disputes, a brief overview of the electronic payment provider process is required. Credit cards are provided to a cardholder by an issuing bank. When a cardholder enters into a transaction with a merchant using the credit card, the issuing bank commits to pay the merchant at the time the transaction is verified.
Each month, the credit card user is sent a statement documenting the purchases made with the card, and the total balance owed. According to the Fair Credit Billing Act, the cardholder can dispute any charges on the statement that he or she thinks are incorrect. The cardholder may or may not have contacted the merchant about remedying the situation before contacting the issuing bank.
The chargeback process varies somewhat from credit card company to credit card company, but generally follows the sequence shown in FIG. 1. At step 1, a credit card holder disputes a transaction with their issuing bank. At step 2, the issuing bank investigates to determine whether the chargeback request is valid, and if it is not, denies the chargeback. At step 3, a provisional credit representing the amount charged is placed back in the user's account. At step 4, the issuing bank initiates a chargeback process and obtains credit representing the chargeback purchase from the merchant's bank. At step 5, the merchant's bank investigates the chargeback request to determine if it is valid, and, if not, the chargeback is returned to the issuing bank. If the merchant's bank determines the chargeback is valid, at step 6, the chargeback amount is removed from the merchant's bank account, and the merchant's bank provides written notice to the merchant. At step 7, the merchant is given an opportunity to refute the chargeback, and, if its documentation is satisfactory, the chargeback is declined and the cardholder is once again charged for the sale. If the chargeback is not declined, the chargeback is successful and the process is completed.